Bond Market Snapshots for the week
- RBI did not accept any offer in the OMO bond purchase auction held last week
- RBI announces special OMO, operation twist, auction on 1st October
- RBI devolved Rs 180bn of 5.77% 2030 bond on to primary dealers in last week's auction
- 5.79% 2030 bond yield closed at 6.05%, up by 2 bps while 5.77% 2030 bond yield closed up by 3 bps at 6.04% on a weekly basis
- 5-year OIS yield declined by 3 bps to 4.49%
- Liquidity stood at Rs 1.49 trillion as compared to Rs 1.73 trillion previous week
RBI sent out two different signals to the bond market last week,confusing traders who were anyway nervous on the 2nd half supply of bonds from the government. In the OMO bond purchase auction, RBI rejected all bids and traders took this as a signal that the central bank did not want to accept bids at lower than market yields. However, in the government bond auction, RBI devolved the full Rs 180 billion of the 5.77% 2030 bond on to the primary dealers at 6%, the 3rd devolvement of the bond for the same amount over the last 1 month. This indicates that the RBI does not want to give the bonds at auction determined yields to the market.
Bond markets are confused on what to do with RBI showing a two face nature. The government is set to announce its 2nd half of this fiscal year borrowing program this week and there is nervousness on the size of the borrowing. Stress on revenues due to economic slump will cause the fiscal deficit to balloon and this will have to be funded by market borrowings. The market is having to absorb over Rs 400 billion of bonds from the center and states every week and fatigue has set in.
RBI has to have a clear plan on how it wants to handle market fatigue as well as on handling the government borrowing requirements. The huge increase in bonds outstanding in investor books can lead to large scale losses if yields rise disproportionately.
During the week, the 5.77% 2030 yield increased by 3 bps to 6.04%, the 5.79% 2030 bond yield increased by 2 bps to 6.05%, while 6.45% 2029 bond yield declined by 2 bps to 6.14%. 5-year benchmark 5.22% 2025 yield decreased by 3 bps to 5.38%. 6.19% 2034 yield level rose by 4 bps to 6.41%. Long term paper 7.16% 2050 yield increased by 4 bps to 6.75%
On a weekly basis, the spread of 10-year bond over 3-year bond (6.84% 2022) remained flat at 160 bps. The spread of 10-year bond over 5-year bond (5.22% 2025) increased to 67 bps from 62 bps. The 15-year benchmark over 10-year benchmark spread remained flat at 35 bps.30-year benchmark over 10-year benchmark spread decreased to 61 bps from 65 bps.
In the weekly SDL auction, the average 10 years SDL cut-off yield stood at 6.72% as compared to 6.7% during last week.Consequently, spread over benchmark 10-year yield declined to 69 bps from 73 bps of last week auction.
One-year OIS yield came down by 1 bps to 3.82% while the five-year OIS yield decreased by 3 bps to 4.49% on a weekly basis.
System liquidity as measured by bids for Repo, Long Term Repo, Reverse Repo, Term Repo and Term Reverse Repo in the LAF (Liquidity Adjustment Facility) auctions of the RBI, drawdown from Standing Facility (MSF or Marginal Standing Facility) and CMB was in surplus of Rs 1491 billion as of 25th Sep 2020. Liquidity was in a surplus of Rs 1736 billion as of 18th Sep 2020.
| Government Bond Yields | Friday, September 25, 2020 | Friday, September 18, 2020 | Change in bps |
|---|---|---|---|
| 5.22% 2025 | 5.38% | 5.41% | -3.0 |
| 6.18% 2024 | 5.29% | 5.32% | -3.0 |
| 7.17% 2028 | 6.10% | 6.11% | -1.0 |
| 6.45% 2029 | 6.14% | 6.16% | -2.0 |
| 5.79% 2030 | 6.05% | 6.03% | 2.0 |
| 5.77% 2030 | 6.04% | 6.01% | 3.0 |
| 6.68% 2031 | 6.30% | 6.35% | -5.0 |
| 6.19% 2034 | 6.41% | 6.37% | 4.0 |
| 7.16% 2050 | 6.75% | 6.71% | 4.0 |
| Average Traded volumes NDS OM Rs Billion | 2.20 | 3.45 | -1.3 |
Liquidity Rs Billion
| Reverse Repo (Fixed Rate) | -4249.74 | -4475.39 | 225.7 |
| Repo (Fixed Rate) | 10 | 10.0 | |
| Long Term Repo | 2380.17 | 2380.17 | 0.0 |
| MSF | 0 | 0 | 0.0 |
| SLF | 368 | 359 | 9.0 |
| MSS (T-Bills & CMB) (Total Outstanding) | 0 | 0 | 0.0 |
| Reverse Repo (Variable rate) | 0 | 0 | 0.0 |
| Repo (Variable rate) | 0 | 0 | 0.0 |
Overnight Index Swap Yields
| 1 Year | 3.82% | 3.83% | -1.0 |
| 5 year | 4.49% | 4.52% | -3.0 |
| Spread | 0.67% | 0.69% | -2.0 |
T-bill Auction Yields
| 91 day T-bill | 3.36% | 3.32% | 4.0 |
| 364 day T-bill | 3.73% | 3.69% | 4.0 |